3.9 Strategic methods: how to pursue strategies

Growth objectives

1. Maxamising the amount of profit earned by the firm

2. Maximising shareholder wealth

3. Spreading risk by diversification

4. Increase market share

5. Focusing on core competences

Organic growth

Growth from within business from what it is good at

External growth (Inorganic growth)

Growth from outside of the business, normally achieved along side organic growth

Advantages of organic growth

1. Low risk

2. Controlled growth

3. Builds on existing strengths and core competencies

4. Slow growth - time to adapt to change

Disadvantages of organic growth

1. Lack of strategy or vision

2. Takes time

Advantages of external growth

1. Faster growth

2. Used to complement organic growth

3. Can acquire missing technology

Disadvantages of External growth

1. Higher risk

2. Business must have a sound financial base

Retrenchment

To cut back or reduce something

Examples of retrenchment

1. Closing divisions or factories

2. Freezing recruitment

3. Delayering

4. Reducing output/capacity

Reasons for retrenchment

1. Costs are too high

2. Low ROCE

3. High gearing

4. Failed takeover

5. Loss of market share

6. Economic downturn

Issues cause by growth & retrenchment

1. Economies of scope

2. Synergies

3. Overtrading

4. Economies of scale

5. Diseconomies of scale

Economies of scope

When unit costs are lower when a business produces a wider range of products rather than specialise in just one or few products

Synergy

Occurs when the value and performance of two companies combined will be greater than the sum of the separate individual businesses

Overtrading

When a business expands too quickly without having the financial resources to support such a quick expansion

Preventing overtradin

1. Reducing inventory levels

2. Slow pace of growth until cash balances improve

3. Lease capital

4. Obtain longer payable days

5. Shorten receivable days

Impacts of growth and retrenchment on functional areas

1. HR:

   • Job security and insecurity (how permanent is the job)

   • Extensive training - new machinary or new management

   • Information sharing may become harder or easier - might have to change organisatinal structure

2. Operations:

   • Technology can make processes more efficient; they can track orders, stock levels and in-work-progress

   • More or less resources will be needed - need to be budgeted for

   • May change from labour intensive to capital intensive

   • With retrenchment low moral and may be difficult to hire staff affecting productivity

3. Marketing:

   • Marketing strategies may have to be more complex

   • More market research

   • Greater specialisation in the market

   • Using a range of promotional techniques

4. Finance:

   • More capital may be required to fund growth

   • Cashflow - amount of cash required to replace or upgrade capital requirement

   • Acid test ratio/current ratio - does the firm have enough cash to fund its day-to-day activities

   • Shareholder value (up or down)

   • Controlling budgets

   • With retrenchment firm may need to sell of fixed and current assets, renegotiate loans or debts, chase debtors so that cashflow can be improved

Methods of growth

1. Mergers

2. Takeovers

3. Horizontal integration

4. Forward verticle integraton

5. Backwards verticle integration

Merger

A combination of two businesses achieved by forming a completely new business into which the two are fully integrated

Takeover

Involves one business acquiring control of another. This can be hostile

Horizontal integration

A business strategy that involves acquiring a business at the same stage of the supply chain and same industry

Advantages of horizontal integration

1. Economies of scale

2. Increased market share

3. Reduced rivals

4. Shared resources

5. Increased bargaining power

6. More knowledgeable about the market and customers

Disadvantages of horizontal integration

1. Reduction of choice for customers

2. Clashes of management style and culture

3. Risk destroying shareholder value

4. Reduced productivity in the long run

Forward verticle integration

Acquiring a business forwards in the supply chain

Advantage of forward verticle integration

1. Guarantee quality

2. Increased knowledge of consumer

3. Guarantee supply

4. Spreads risk

5. Two income streams

Disadvantages of forward verticle integration

1. High initial investment

Backward verticle integration

Acquiring a business backwards in the supply chain

Advantages of backwards verticle integration

1. Control of supply chain

2. Increased supply of raw materials

3. Power of suppliers

4. Increased price for raw materials for competitors

5. Secured supply of raw materials

6. Controls how the product is sold

Disadvantages of backward verticle integration

1. Expensive

2. Lack of experience

Conglomerate integration

The coming together of firms that operate in unrelated markets or industries

Advantages of conglomerate integration

1. Diversification

2. Spreading risk

3. Increased customers and brand loyalty

4. Managerial economies

5. Cross promotion

6. Long-term survival

Disadvantages of conglomerate integration

1. May lose focus on core competences

2. Lack of experience and knowledge in that market

3. Lots of research needed which can be expensive

Franchising

When a franchisor gives another business (franchisee) the right to supply its product or service to its customers

Advantages of franchising

1. Quick way of expanding

2. Less capital to buy to expand

3. Less responsibility of all employees multiple sites

4. Expansion can lead to marketing economies and awareness of brand

5. Increased profits

   1. More availability of the good for customers

Disadvantages of franchising

1. Brand image is vulnerable

2. Less control overall, for example, training of staff

Innovation

The practical application of an invention into marketable products or services

invention

The formulation of new ideas for products or process

Product innovation

Launching new or improved products/services on to the market

Process innovation

Implementing a new or improved production process, delivery method or communication method.

Benefits of product innovation

1. Greater perceived added value

2. Higher prices

3. Build early customer loyalty

4. Enhanced reputation as an innovative business

5. Increased market share

Benefits of process innovation

1. Reduced costs

2. Improved quality

3. More responsive customer service

4. Greater flexibility of operations E.g Zara

Pressures for innovation

1. Access to new markets

2. R&D can lead to new and efficient manufacturing processes

3. Economic change - pressure for lower cost solutions

4. Social change - pressure to be environmentally friendly

5. Creates new products:

   • New

   • Redesigned (Apple)

   • Re-launch stage of the PLC

Ways of becoming innovative

1. Kaizen techniques

2. Research & Development

3. Intrapreneurship

4. Benchmarking

Kaizen techniques

Continuous improvements, focusing on achieving sustained continual improvements in the product and process of an organisation

Research & Development

Activities that companies undertake to innovate and introduce new products and services

Intrapreneurship

Where large businesses enable employees and managers to demonstrate entrepreneurial behaviour in their work to the benefit of their employer

Ways to encourage and facilitate intrapreneurs

1. Structure time away from work to allow employees and managers to develop business ideas - E.g. Google’s 20% time policy

2. Build cross-functional teams to lead innovation projects

3. Staff competitions and innovation days - E.g. hackathons, development coding days to find ways to come up with innovative ideas

Reasons why some large businesses aren’t intrapreneurial

1. Culture - complacency/arrogancy of how they have previously developed their success

2. Bureaucracy - Stifles innovation

3. Short-termism - Discouraging long-term thinking or risk-taking

Benchmarking

Understanding and evaluating the current position of a business in relation to the best practices and to identify areas and means of performance improvements

Key steps in benchmarking

1. Understanding in detail existing business processes and performance (internal)

2. Analyse the business processes & performance of others

3. Compare own business with others

4. Implement steps necessary to close performance gaps

Types of benchmarking

1. Strategic benchmarking - Market leader

2. Performance or competitive benchmarking

3. Process benchmarking

4. Functional benchmarking

Ways firms can protect intellectual property (IP)

1. Copyrights

2. Patents

Copyrights

Gives legal protection against copying for authors, composers and artists

Patents

Protects new inventions and covers: how things work, what they do, how they do it and what they are made of and how they are made

Impacts of innovation on functional areas

1. HR:

   • If a business has a reputation for innovation then it normally follows the business is growing and therefore more employees will be needed

   • These employees need to innovate and be intrapreneurial

   • Kaizen and benchmarking techniques can empower and motivate staff and therefore the job design and structure of the organisation also become important.

2. Finance:

   • Innovation is an expensive strategy which managers have to make long-term and short-term decisions about

   • R&D can have a major impact on cashflow

   • Not all R&D is successful (can be a sunk cost) so costs and benefits must be weighed up

   • Patents and copyrights can be expensive to obtain and administer

3. Operations:

   • New machinary or processes may have to be introduced

   • New training and skills may be required

   • Kaizen makes all employees responsible for being innovative in reducing their waste or making processes more efficient

4. Marketing:

   • Increased market research to discover if the product will appeal to customers

   • Marketing department can use information from the product life cycle to ensure that as one product enters maturity, it either has new features to give it an extension strategy or a new product development entering the introduction stage

   • Ensuring the product portfolio is relevant and appealing to customers and should enable the innovation to be relevant to the customers.

Reasons preventing innovation

1. May not have finance available for the investment

2. Short-termism - Innovation takes the long-term view

3. Bank may not be willing to lend money for the investment

4. Relatively low success rate - ‘buying in’ new ideas may actually be a cheaper option